BILL Holdings, Inc. (BILL) Earnings Call Transcript & Summary

Good afternoon, everybody. It's Tim Willi with Wells Fargo. I apologize for the technical delay on my end. Apologies again. Just real quickly, if you have a question for the session, you can e-mail me at [email protected]. We'll be sure to get that in front of John. But that being said, John, very much appreciate the time. I know you have a busy day, and I very much appreciate the time being here.

Maybe just to sort of kick off the discussion, a lot of topics and a lot of directions we could go. I think that one of the things that people are most curious about and comes up a lot on the conference call is sort of talking about the monetization of the cross-border and the virtual card. I think that was a standout and a big part of discussion on the most recent call and some of the work you've done there to internalize some things that helped that success. So could we maybe start just sort of talking about those 2 opportunities? And then we'll get into growing the network and the bank partnerships, et cetera, but maybe start there.

Sure. Sounds good. Thanks, Tim. Yes, we launched both cross-border payments and our virtual card product in the last 18 to 24 months, and we've seen really good initial adoption. Both products give customers and suppliers more choice for them to choose which payment method is best for them. Our goal with these products is to continue to drive adoption of electronic payments and eliminating checks from the system. Ultimately, electronic payments have a better gross margin profile for us. So long term, that's our primary goal. In just looking at virtual card for a second. In Q4, our virtual card volume was about 1% of TPV in the quarter. And we think looking at our supplier base that longer term, we could probably get that TPV to be 5% to 10% of our total TPV. So the opportunity with virtual cards is significant. And to the extent that we're able to continue to drive success at enabling suppliers, 2.5 million members in our network, many of which are merchants of record and accept cards, then we'll see continued growth in adoption of virtual cards. On the cross-border payment front, we ended Q4 of our last fiscal year at about 2.4% of TPV. And over the long term, we think cross-border payments could represent 10% to 15% or even 20% of our total payment volume. One of the important elements with cross-border is the currency that's being used. So today, we're about 75% U.S. dollar, 25% local currency. And over time, we think that local currency component could get to about 40% to 50%, 45%, 50% depending upon how long it takes to get there. But ultimately, giving suppliers more choice about which currency to receive their payments in. So early innings for both of these products, but we like the success that we've seen so far. And both have contributed to the expanding transaction monetization that you've seen in our results over the last few quarters. And there's interesting products yet to come. We recently announced we're in pilot mode on Instant Transfer payments, which is an option for suppliers to get paid literally in the next minute as opposed to days or weeks from now. It's very early but good adoption of that product. It's also variable price and ad valorem pricing model similar to virtual card and FX cross-border payments, so good incremental monetization. So we're encouraged by the results of these products and how they're helping us improve monetization and take rates.

A couple of things on cross-border and then a follow-up on virtual. So on cross-border, when you use the local currency versus just a U.S. dollar payment going cross-border, I guess there's obviously some -- it's reasonably lucrative to just make a cross-border payment to somebody in a non-U.S. country by paying through dollars. And then if they want the local currency instead, it's an amplifier, I'm assuming. How would we think about the magnitude of the difference in being successful in moving that to local currency percentage up to what you said like the 20% or the 40% versus where it's at right now?

Yes. It's a potential significant opportunity and improvement in our monetization. So today, U.S. dollar payment is a fixed fee, call it somewhere between $10 and $20. And FX payment is going to be anywhere from 50 to 200 basis points on the value of the transaction depending upon the currency that's being used, the size of the customer, the volume, so on and so forth. So many U.S. businesses, buyers want to be invoiced and paid in U.S. dollars because they want to eliminate the potential for that currency fluctuation to impact their financials. That doesn't mean though that their supplier doesn't want to be paid in local currency. In fact, many suppliers doing business with our U.S. customers don't even have multicurrency accounts. So that payment is getting translated upon deposit to local currency. And to the extent that we can deliver a better exchange rate to those international suppliers, they'll take us up on the choice to receive local currency, and that would provide a pretty significant uplift to what would otherwise be a $10 or $15 flat rate wire transaction.

Yes. And then on virtual, you talked about some of the, I think, outperformance in the quarter. You work with partners in that business, and I think you internalized maybe the onboarding or the activation of accounts. But I know there was a dynamic that played out in the quarter that I think did deliver some upside and accelerated that business a bit on some stuff that I think you guys sort of control and brought internally?

Yes, that's exactly right. So we work with Comdata on this product. We went to market with them about 18 months ago. They deliver us the virtual card numbers. And when we first launched the product, they were doing all the supplier enablement. Comdata has a large network, 1 million members in the network, and they have lots of experience working with suppliers. So we thought that's the best way to go to market for us. Now that we've been in market for a number of quarters, we decided to start to do that supplier enablement inside. And that activity is, first, a big data problem, matching suppliers. Our customers can name suppliers or their vendors, anything they want. So there's lots of different naming conventions. We consolidate all of that. We create master vendor records, and we match suppliers to either the Comdata network or Mastercard or other data sources to identify which ones are card-accepting merchants. And then we connect with them either electronically or through e-mail, phone, whatever the case may be, and give them a choice of what kind of payment to receive. We're not all about just maximizing virtual card adoption because we wanted to be the right payment method for that supplier and that buyer relationship, so that it becomes a repeat, recurring transaction over time. The progress that we saw in the quarter was really we could do supplier enablement faster than our partner, Comdata, was doing. And then so that brought forward a number of suppliers who were enabled and likely increased the TPV on the virtual card product in the quarter and drove revenue results as well. We thought that might take 2 or 3 quarters to generate those kind of results, but we saw it happen quickly. And then obviously, there's going to be lasting benefits associated with us doing supplier enablement because when we have that direct relationship with the supplier, we're talking to them on a regular basis, digitally or otherwise. That will help us with any other products that we roll out where the supplier is going to have engagement and choice about those products.

And in terms of -- on that topic of engagement and choice, there are so many ways that people can make a payment, right? There's -- you talked about virtual card, cross-border, ACH. You talked about your instant payment, which probably runs on some of those rails; RTP. As we think about, I guess, the dance that goes on within Bill.com about the right transaction for the customer, the right revenue, the risk management, the cost of offsetting everything and you think about the business model, how do we think about the virtual card option versus an RTP or enhanced ACH and sort of how you guide a customer or let them make the decision, present information to them in a way that may not be the highest revenue per transaction optically for those of us that sit where we sit, but internally, there might be offsets around risk management or customer service that ultimately the revenue per customer, which is really what matters, that trajectory continues to go in the right direction regardless of the rails?

Yes. So I think you're exactly right on the key variables that we consider before executing a transaction. First and foremost, we want it to be the right fit because we want to repeat transaction. We've been very successful at expanding monetization in recent quarters, but it's still overall relatively low. Our last quarter, Q1, our take rate, so transaction revenues divided by TPV, was just below 7 basis points. And that's up substantially over the last couple of years, but there's a long way to go as we think of driving adoption of some of these new products that have higher monetization. So our business isn't dependent upon achieving some super high percentage penetration on virtual cards or cross-border payments or anything like that. So we're incented really to just make it as easy as possible for customers to do electronic payments, remove friction, make it easier for them to do business. And by doing that, we know that we'll drive volume across all the payment products that lead to expanding monetization for us.

Excellent. So you talked about engagements and working with the customers. And I guess maybe if we take a step back, you've got a lot of different distribution channels, accounting, a prominent part of the equation; banks, another big prominent part of the equation. You have several big banks, you alluded to another one. Can you talk a little bit about the -- how Bill sort of use that role of helping somebody that has that, per se, direct relationship, the bank, the accounting firm, go out, grow the business, the learnings that you guys have over the years to help those partners be successful where it's really them that the customer is interacting with, but behind it all, you're benefiting from that growth as opposed to failed partnerships or unproductive channels where you just didn't understand how to really make it work?

Yes. So partners are a very important element of our go-to-market strategy. We've worked with partners from the very beginning, whether it be accounting firms, which is where we started. 50% of our customers, roughly a little bit less in revenue terms come from our accounting firm relationships. We recently actually leveraged some of the products that we offer accountants to better manage their client relationships. We're now offering those same tools to wealth managers to allow them to better manage their relationships with their high net worth individuals. So it's an example of how working with partners opens up market opportunities for us. As it relates to the financial institutions, obviously, we started working with accounting firms because they're a trusted partner of small businesses. The same is true with banks. Small businesses rely on their banks for many services, in some cases, a credit relationship and other capabilities. And they represent -- we work with 6 of the 10 largest banks in the U.S. They represent almost all of the installed businesses in the U.S. For commercial customers, it's tens of thousands. For small business, it's millions of customers. So we've been doing this a long time. There hasn't been as much innovation on the part of banks investing in capabilities for B2B payments and small businesses. So they're able to leverage the investments that we've made to bring new capabilities, new cloud technology to help automate financial operations for AP and AR, workflow, document management, all of those things. By plugging those capabilities into their online business banking environment, banks are able to differentiate their offerings to -- whether it's commercial or small business customers and ultimately serve those customers better, drive higher retention rate, higher deposits, ultimately a higher ROI from their customer relationships. One of the elements of working with these large financial institutions is that it takes time for the partnerships to evolve from initial integration with them to eventually launch and then product marketing and driving adoption. But we're really enthusiastic about working with them. We recently reported our -- an update on our remaining performance obligations, which, as of the end of September, was about $150 million, which is up over $100 million year-over-year. And that's just the minimum financial commitments that we have from our financial institution partners, which really means they're bullish, too, on the potential opportunity for our platform to help them serve their small business customers or their commercial customers, hence, the size of the commitments that they're making to us.

Is there any way to think about the role that Bill.com plays in terms of the go-to-market for -- I'm sure every bank's different, and depending upon the accounting firms, there's a different approach. But I got to think somewhere, over all the years you've been doing this, the various partners you've worked with, the experiences, when we get to sort of the marketing and the onboarding and serving the channel versus serving the small business, right, sometimes those are different discussions. Is there any way to think about the progress or maybe how you view the competitive differentiators of Bill.com in that kind of ecosystem environment?

Yes. I mean our mission is to make it simple to connect and do business with an emphasis on small businesses. It's our sweet spot. There's fewer companies out there working on behalf of small businesses. So we feel like it's the most underserved part of the market. As a result of doing that for over a decade now, we've learned a lot about how small businesses work, what it takes to enable them to succeed, how simple a product offering needs to be to drive down complexity, reduce barriers to -- for customers to adopt the platform and ultimately drive success and ROI per customer. So we're able to share that learning with our financial institution and accounting firm partners. And I think working in conjunction with them allows us to drive success in their customer base and ultimately lead to more awareness in the market by businesses of a better way of doing businesses, by leveraging the cloud versus legacy manual paper-based systems. 80% -- a recent survey, we saw 80% of small businesses say that they still rely on paper checks as a primary form of payment. That tells us that everything that precedes it, that paper check in their financial operation process is probably also paper. And that's where the big opportunity comes in for us. And whether it's working with accounting firms or banks or software providers, we're really excited about that long-term opportunity.

So one of the things that you guys have mentioned over time is as you grow the business, build the network, other product adjacencies -- and I know you've got a lot going on right now with boarding various big partners. But when you think about other product adjacencies or services, whether it be credits -- I think supply chain finance comes up at times. You talked about instant deposit, which, I guess, is a payment product but something new, and it's serving a different need. Where should we think about like the most logical sort of adjacencies? Or I guess there's even talk of just going upmarket, which will bring its own set of complexities and new products that need to be developed as you go upmarket a little bit. But just any thoughts there?

Yes. So I think our -- I'll start with the last part, the upmarket because we have been putting more effort behind meeting the demand from larger businesses that we have. And the larger the business, more users, more transactions, obviously, results in a higher ARPU, higher revenue per customer for us. But they also have some needs that are more complex than the small businesses that maybe it's a security feature, like single sign-on or bulk payments or controls like dual approval for payments. Those are things that we have either launched or in the process of launching in support of those larger customers because we see a lot more demand there. And as you know, with our hybrid business model, we drive revenue from both subscriptions and transactions. So we like that model because the more customers use our platform, the more revenue we generate, the more they pay. It sort of aligns the activity levels. So we think there's opportunities for us to continue to roll out payment products. Instant Transfer is just the most recent product that we mentioned after cross-border and virtual card. There's more opportunities there. And I think in the quarters ahead, you'll see us continue to make progress. By rolling out new products, it typically drives adoption of the base and increases our share of wallet from customers, such that we're getting the lion's share of their B2B payments whether it's on the AP or the AR side. And then over time, as we look at some of the investment opportunities ahead, we think we can increase the breadth and depth of the platform by adding new products such as spend management or expense reporting, bring some intelligence and some optimization capabilities to the workflow, digitization, collaboration capabilities we already have. We're also looking at ways to increase the value of our AR offering. So we do both AP and AR today that's very unique, especially focused on small businesses, but the bulk of our business still indexes towards AP. So we're interested in finding ways to improve the way we can deliver invoices electronically, improve payment methods, make collections faster, things like that. And then you mentioned a couple of things that are, I think, adjacencies, very relevant for our business where we sit in the middle of transactions. Payroll and human capital management are also processes that are underoptimized, and there's efficiencies to be gained there. Working capital, whether it's invoice advances or other things like that, are really interesting given the data asset that we have, where we sit in the middle of the transaction flows and have already done some underwriting on our customers. So we're not as much focused on balance sheet lending and becoming a financial services company but certainly partnering with folks that would be sort of an obvious thing that we could offer down the road. These are examples of areas that we think investments could make sense as opposed to specific near-term product rollouts that we'll be mentioning.

Yes. So sort of on a related topic, M&A is obviously something that every company thinks about. You have a share price in terms of a cost of equity that's extremely low, plenty of -- I think cash on the balance sheet will be after the offering you announced on the notes. How do we think about Bill.com and M&A? Are we starting to move -- and Rene even talked about it, wanting to be public partially to have this share to offer and use. Are we moving into a different phase with Bill.com where that becomes a little bit more real possibility than even a year ago or 2 years ago? It feels like maybe there's some positioning to be there. Maybe I'm reading the body language wrong, but just sort of thoughts there?

Yes. I think that's a fair assessment. We obviously did the capital raise through a convert recently. That was an opportunistic capital raise on great terms with a structure to minimize dilution. With the additional capital, we feel like we're positioned to continue to invest across all areas of the business and consider new strategies, whether it's partnering with companies to bring products to market jointly or even acquiring capabilities. I just mentioned a few categories of potential priorities that could be candidates for acquisition. So it's something that we'll consider over the next couple of years. We don't have any imminent plans or anything like that to announce. But part of the strategy behind the capital raise was to make sure that we are able to be opportunistic and make investments in new ways. Relative to how we built the business. Today, it is 100% organically. We have an integrated platform. We'll continue to build out many of the core capabilities that are needed, but we'll look opportunistically at other assets that might help us serve small businesses.

So one of the things that you've also referenced, and I guess this is more to like the corporate organization and probably priorities around spending. I mean you talked about a new headquarters location and expanding the head count, and probably not a surprise to anybody that's got the top line that you do and some of the big partnerships that are coming on. But I guess just for the sake of discussion and when you think about the investments within the corporate staff, I mean, are there areas where we should think about here's an area where relative to where it used to be, it's really getting a ramp-up, whether it's sort of marketing and service and onboarding or product and engineering or just sort of the SG&A that helps the company become a bigger company as opposed to trying to catch up, you're going to get in front of that a little bit? Just anything that we should think about at a corporate level about the growth in the infrastructure you're putting in place?

Sure. Well, let me start with sales and marketing because we've always been really efficient at driving customer acquisition through self-service, this go-to-market strategy ecosystem that we talked about, efficient 5-quarter payback. I mean being efficient in sales and marketing allows us to invest more in R&D. And you've seen that recently, right? In the last quarter, we had an uptick in R&D spend that we had obviously talked about in advance in support of having 3 new financial institution partners that we're working on integrating simultaneously as well as bringing new payment products to market. We're going to continue to invest in R&D. We're a product-driven company. And we're going after the small business market, which has millions of potential customers, therefore, ease of use and simplicity become critical, and those are ongoing investments. And then on the G&A front, we index a little bit higher than a pure software company, in part because of the payment capabilities that we have, the proprietary payment technology that we've built, regulatory investments for money transmitter licenses and compliance. So those ultimately result in a little bit higher expenses that, over time, through growth will be able to create economies of scale. But at the same time, those capabilities are part of our competitive advantage in being able to bring new products to market within the regulatory umbrella. So we feel like it's a good defensive investment as well.

Great. And then just one last one. I don't remember if it's come up recently on an earnings call, but just in terms of international. You've obviously got cross-border payments. You've got a big network that sits out there at sort of the nodes, I guess, or the end. How do we think about international? There are obviously a lot of -- there are a handful of markets that are similar to the U.S. in terms of accounting and compliance and legal, et cetera, that most people go after in the payments world. So I mean is that something we should be thinking about or not be surprised to hear about in the coming, whatever, 12 to 24 months about some partnerships or what have you that put some flags in the ground?

Yes. International is a huge opportunity. Some of the markets are different because they're already advanced in terms of electronic payment adoption, but they still have workflow challenges and legacy systems. Our cross-border payment product is allowing us to learn the footprint of international suppliers from our U.S. customer base and I think will be the beginnings of forming our international expansion strategy that we'll talk externally about over the coming year as we formalize those plans.

Wonderful. Well, John, I apologize for my delay, technical on my end, but really much appreciate the time. I know you've got a busy day. Thanks for participating, and talk soon. Thank you.

My pleasure. Great. Thanks, Tim. Take care.

You, too.